On the Beach Group (LSE: OTB) may not sound like one of the market’s top growth stocks but over the past few years, thanks to an aggressive marketing strategy and good reputation among customers, the company’s growth has exploded.
On the Beach does exactly what its name suggests. The firm sells beach holidays mainly to customers in the UK and is just starting to expand overseas. For the first half, the company reported revenues of £38.1m, of which £37.5m came from the UK market, and £0.6m was international.
What makes the company stand out from its existing legacy peers is its value proposition. You see, it is a disruptor within the tourism industry as the company has used technology to improve its customer offering, keep costs low and grab market share. The business is an online-only travel agent, which means that compared to other companies in the industry, overheads are low and there’s more cash available for reinvestment into marketing. For the first half of the year, 27.5m customers visited its websites, up 9.5% year-on-year. Direct costs for the business dropped to 13.6% of revenue and marketing expenses fell to 40.5% of revenue, from 46.3%.
Benefits of scale
On the Beach is seeing the benefits of scale accelerate its growth now that it is well established in the UK. After reporting a pre-tax loss of £2.5m for the year ending 30 September 2015, profits have expanded significantly and City analysts are expecting the company to report a pre-tax profit of £27.5m for the 12-month period ending September this year. Further growth is anticipated for the following financial year. Analysts have pencilled-in earnings per share growth of 25% to 21.3p as On the Beach’s bottom line continues to benefit from economies of scale. And considering the company’s projected growth rate, the shares look undervalued at current levels.
Indeed, shares in On the Beach currently trade at a forward P/E of 19.5 and a PEG ratio of 0.6. A PEG ratio of less than one signals that the shares in question offer growth at a reasonable price. As On the Beach continues to expand, this is one stock that looks set to produce huge returns for shareholders in the years ahead.
Zero to hero
Sanne Group (LSE: SNN) is another company that looks set to generate huge returns in the years to come.
Sanne’s growth over the past three years has been nothing short of staggering with pre-tax profit growing from £7.8m to the £39.9m projected for this year. At the same time, earnings per share increased from 6.3p to 23.6p. Analysts are expecting this growth to continue. After rising 34% for 2017, City analysts have pencilled-in earnings per share growth of 16% for 2018.
Even though the shares may look pricey at 27.2 times forward earnings, a PEG ratio of 0.8 signals that despite the lofty valuation, shares in Sanne offer growth at a reasonable price.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.